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Overhead Resistances

US stocks rallied sharply today for their first gain in more than a week. US Treasury yields also retreated after a surprise intervention from the Bank of England in the UK bond market. Investors cheered the move by BOE to stabilize the UK bond markets.

The S&P 500 Index rebounded 71.75 points or 1.97% to 3,719.04. The Dow Jones Industrial Average gained 548.75 points or 1.88%, closing at 29,683.74. The Nasdaq Composite Index rallied 222.13 points, or 2.05%, to 11,051.64. The benchmark 10-year Treasury yields logged one of their biggest declines since 2009, falling to 3.705% after touching a high of 3.992% yesterday. The US dollar reversed its recent strong gains by generating a daily negative outside reversal as the UK pound stabilizes. WTI crude oil rose sharply today on drops in supply and a weaker dollar, gaining 4.6% and ending the day at 82.15.

The yield declines in the UK were driven by long-term bonds today. In the US, the long and short maturities experienced sharp yield declines.

Some investors believe BOE intervention today is a subtle sign that the Fed may need to slow the pace of interest rate hikes after evaluating the global dislocations. Others fear the Fed will raise rates at the current pace to fight inflation, and absent a more serious US stock and bond market selloff, the central bank remains committed to a restrictive policy.

The current outlook for stocks remains bearish despite the bounce today. It is less conclusive whether today’s stock and bond market rallies are sustainable as the primary trend in stocks is down, and the primary trend in yields is up.

The current macroeconomic, geopolitical, and market internals suggest a challenging and volatile market environment over the near-to-medium term. There are numerous bearish indications, including four (4) gap-downs (i.e., 8/22, 9/13, 9/16, and 9/23/22), two (2) negative outside days (i.e., 8/26 and 9/21/22), and an ongoing complex head and shoulders top pattern.

Although the SPX Index has yet to violate its summer lows (3,636.87 – 6/17/22), any rallies are likely to be oversold rallies as long as SPX retains its primary Jan 2022 downtrend (currently falling at 4,254) and Aug 2022 short-term downtrend (3,993). The death cross signal in mid-Mar 2022 also warns of the continuation of a bearish trend as SPX must trade above its 50-day ma (4,026) and 200-day ma (4,223) to negate the downtrend.

The immediate challenge for SPX is to create the necessary technical base to sustain a recovery. First, SPX must not violate its Jun/Sep 2022 lows or neckline support at 3,623-3,637. Violation of neckline warns of a significant SPX selloff of 677-702-points, corresponding to the height of the 4-month head and shoulders top pattern.

Second, SPX must surpass two critical resistances to convince traders to return. Near-term resistance is visible near 3,950 +/- 50, coinciding with 9/16/22 gap-down (3,881-3,888), 6/28/22 high (3,946) or left shoulder 2, the 9/21/22 negative outside day high (3,907) and the right shoulder 2, the 38.2% retracement (3,891.5) from the 8/16/22 to 9/27/22 decline, and Aug 2022 downtrend (3,993), the 50-day ma (4,026), and 9/13/22 gap-down (4,037-4,088).

Formidable resistance remains at 4,200 +/ 50, and the ability to clear this supply signals the start of a sustainable intermediate-term SPX recovery. The area corresponds to several technical convergences, including right shoulder 1 (4,119/4,293 or 8/16 and 9/12/22 highs), left shoulder 1 (4,177.5 – 6/2/22 high), 8/22/22 gap-down (4,195-4,219), 200-day ma (4,223), and Jan 2022 downtrend (4,254).


Source: Chart courtesy of StockCharts.com


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Technical Summary Equities – SPX nears pivotal intermediate-term resistance at 4,105-4,219 or the top of the Jan/Mar 2022 downtrends, Jun, and Sept 2022 highs, the 50% retracement from the Jan-Oct 202